(Bloomberg) -- The rupiah is closing in on a pandemic-era low, putting pressure on Indonesia’s central bank to raise interest rates to support the beleaguered currency.

The currency, which breached the key 16,000 level last week, may fall toward 16,500 per dollar as the Federal Reserve’s rate cut timeline gets pushed back, according to Wells Fargo Securities. Strategists at Brown Brothers Harriman & Co. see the rupiah hitting 17,000 against the greenback by September. 

The weakness is building the case for Bank Indonesia to resume policy tightening at its meeting on Wednesday after intervention failed to stem a slide in the rupiah. Traders are anticipating a hawkish outcome, with the spread between Indonesia’s rate-sensitive two-year yield and the policy rate widening to levels last seen in October when the central bank unexpectedly hiked. 

“Rupiah depreciation pressures would persist if they only deliver a hawkish hold,” said Brendan McKenna, an emerging markets currency strategist at Wells Fargo in New York. “Additional tightening is the best course of action.” 

The currency has slumped 5.3% this year to its weakest since April 2020. The pace of depreciation accelerated this month following a pullback in expectations for the Fed’s easing and Middle East tensions. 

Economists are split in predicting BI’s rate decision. Of 22 surveyed by Bloomberg, seven forecast a quarter-point hike, while the rest see no change at 6%. 

A $1.8 billion outflow from the nation’s bond market amid concerns over President-elect Prabowo Subianto’s spending plans has also weighed on the rupiah. Foreign repatriation of seasonal dividend payments and a narrowing trade surplus add to the currency’s woes. 

Other Tools

Bank Indonesia has a wide range of tools to stabilize the exchange rate, including direct intervention as well as lifting the yield on rupiah securities to attract foreign flows. The government also told state-owned enterprises to refrain from making large dollar purchases for import or debt servicing requirements.

As dollar strength persists, however, relying on those non-rate tools may prove insufficient.

“The march to 17,000 will be by the stairs, not the elevator” as Bank Indonesia will cushion the decline, said Elias Haddad, a senior market strategist at Brown Brothers Harriman in London. “But no hike may not help.” 

Here are the key Asian economic data this week:

  • Monday, April 22: China 1- and 5-year loan prime rates, South Korea 20-day exports/imports, Indonesia trade balance
  • Tuesday, April 23: Japan PMI, Singapore CPI
  • Wednesday, April 24: Australia 1Q CPI, Bank Indonesia rate decision, New Zealand trade balance
  • Thursday, April 25: South Korea 1Q GDP, Malaysia CPI
  • Friday, April 26: Bank of Japan rate decision, Australia 1Q PPI, New Zealand consumer confidence

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